Macroeconomics

Summary

1.

Macroeconomics is the study of the economy as a whole, including growth

in incomes, changes in prices, and the rate of unemployment. Macroecono-

mists attempt both to explain economic events and to devise policies to

improve economic performance.

2.

To understand the economy, economists use models—theories that simplify

reality in order to reveal how exogenous variables influence endogenous

variables. The art in the science of economics is in judging whether a

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The Science of Macroeconomics

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1.

Explain the difference between macroeconomics

and microeconomics. How are these two fields

related?

2.

Why do economists build models?

K E Y   C O N C E P T S

Macroeconomics

Real GDP

Inflation and deflation

Unemployment

Q U E S T I O N S   F O R   R E V I E W

Recession

Depression

Models

Endogenous variables

Exogenous variables

Market clearing

Flexible and sticky prices

Microeconomics

3.

What is a market-clearing model? When is it

appropriate to assume that markets clear?

model captures the important economic relationships for the matter at

hand. Because no single model can answer all questions, macroeconomists

use different models to look at different issues.

3.

A key feature of a macroeconomic model is whether it assumes that prices

are flexible or sticky. According to most macroeconomists, models with

flexible prices describe the economy in the long run, whereas models with

sticky prices offer a better description of the economy in the short run.

4.

Microeconomics is the study of how firms and individuals make decisions

and how these decisionmakers interact. Because macroeconomic events

arise from many microeconomic interactions, all macroeconomic models

must be consistent with microeconomic foundations, even if those founda-

tions are only implicit.

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P A R T   I

Introduction

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